Picking Up Fractions of a Penny

2008-11-09T01:56:36Z

Since discovering how to use Kelly’s criterion to optimize portfolios, I have been applying it to recover my score in the Foresight Exchange game. I was betting on various political claims. To optimize my portfolio, I needed to know the probabilities of who would win the American elections and nominations. As a proxy for the true probabilities, I used the bid and ask prices on the IEM.

This worked well; however on occasion the IEM yields inconsistent values. Sometimes the total bid prices for a claim is more that $1, occasionally the total ask prices for a claim is less than $1. These correspond to arbitrage opportunities. I had to wait for them to disappear before I could use the market values.

If I had an account with the IEM, I could get rid of these arbitrage opportunities myself, and make a little money on the side. In April 2007, I borrowed $10 and opened an account. Then, because it was so easy, I step up a cron job to notify me whenever these arbitrage opportunities occurred.

I was surprised how much money was available from these arbitrage opportunities. To date, I have made approximately $67 from arbitrage. This more than covers the $5 account creation fee, plus the extra $2 I paid back in interest and overhead to my investor. The chart below shows approximately how much money I had made over time.

This chart isn’t quite exact. The IEM has an option to buy or sell a bundle at market prices. However, sometimes this fails for no apparent reason, and I am forced to buy or sell each individual share (which is a bit risky if the arbitrage opportunity disappears during a transaction). I have only included the profit I made from using their bundle purchase mechanism. If you look really carefully, you will see that I make a mistake on occasion by buying when I am supposed to be selling, or some other such mistake.

As for the Foresight Exchange, I managed to improve my score there. I made quite a few points betting against McCain winning the Republican nomination. Then I sold those bets at a profit, and made a few more points betting that he would win the party nomination. However, I must admit that my biggest improvement in score came from betting against the US attacking Iran, which is still an on going claim.